Duck! It’s director season

OCTOBER IS THE MONTH directors dread more than any other. These are the days and weeks when boards are paraded before investors. They face a barrage of angry crossfire over company results, executive pay and must argue to keep their jobs. They endure minority but vocal shareholders.

Then there are the destabilising votes unleashed by powerful investors like
Gina Rinehart
,
James Packer
and
Nathan Tinkler
. But that is not what directors fear most. More than the threat of external forces, they fear the annual shareholder meeting will act as a catalyst to expose the ugly truth: that boards are often infected with in-fighting, politics, towering egos and deep personality clashes.

“Boards cannot get rid of a director if they don’t think they are any good," says Colin Carter, director of SEEK, Lend Lease and Wesfarmers, who has conducted hundreds of board reviews.

“It is the only job in the world where your colleagues and superiors can’t sack you," he says.

While shareholders hold the power to hire or fire their directors, they have no way of telling whether someone is performing. Investors are not alone. According to the latest University of Sydney Business School leadership research for Boss, almost a quarter of senior employees have no idea whether their board is providing a good strategic direction for their company.

The problem lies with the first rule of the directors’ club: you never talk about the club. The dilemma for companies, their boards and investors alike is that once inside the boardroom, incumbent directors can be impossible to remove. The turnover rate at top 200 companies is less than 11 per cent each year.

The rate is roughly the same for both poor and ­well-performing companies.

“There is a mechanism for removing directors but it is a blood-on-the-floor-type scenario,"
Leigh Clifford
, chairman of Qantas, says.

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Poisonous relationships

If you require proof of the poisonous relationships which sometimes exist, consider one boardroom report by recruiters Korn/Ferry that asked leading directors, including
Michael Chaney
,
Belinda Hutchinson
and
David Gonski
, to identify the personality traits which prove most problematic.

The egocentrics, the hesitaters and hand-grenade throwers, the hobbyhorse jockeys, policeman, nodders and non-stop talkers top their list of deadwood directors.

“I have seen just about all of them," laughs Chaney, who is on the boards of National ­Australia Bank and Woodside Petroleum.

Clifford says the most problematic people in the boardroom are chairmen who find it hard to take a back seat.

“You always get into bother when the ­chairman and the CEO are fighting for the microphone," he says.

The personality tensions have given rise to what are colloquially known as director “prenup agreements", which allow directors to veto each other’s nominations.

The late
James Strong
famously demanded signed but undated letters of resignation from all his directors on the NRMA board. But the agreements, used by companies including
Coca-Cola Amatil
,
NAB
and
Wesfarmers
, came under Australian Securities and Investments Commission scrutiny and have been outlawed for subverting shareholders’ rights.

“The reality is that a board needs to be a team but the law is saying board members have no say in who is on their team, yet I am held legally accountable if the board fails," Carter points out.

Gonski says the prenuptial deals have been refined so a director now agrees that if their fellow directors lose confidence in their ability, they agree to stand for re-election at the next shareholder meeting.

If the board chooses not to endorse them, they will usually stand down once they realise the prospects of success are remote.

Powerful weapon

“That does give you quite a powerful weapon to have in your back pocket," Gonski tells Boss.

Other leading directors who spoke to Boss claim that more often than not directors do play by the rules of the club.

“Most directors I know wouldn’t stand if they did not have the support of their colleagues," Wesfarmers chair Bob Every says.

CBA director Harrison Young agrees.

“The chairman ought to be able to take someone aside and say, ‘I think you should retire a little earlier than we had planned,’ " he says.

But often a director refuses to go,
Fairfax
chairman and RBA board member
Roger Corbett
says.

“In the comradeship of boards which develops over time, it becomes very, very personal and therefore quite difficult to implement. You have worked together for years so it is very hard to say, ‘Bill, you’re beyond it’. I have been on boards where colleagues say ‘I don’t want to stay a moment longer than I should, would you let me know when you think I should retire.’ Well, the time has come and I have let them know and I can tell you they didn’t appreciate it."

Compromising position

In response, boards have developed all manner of subterfuge to ensure they get the directors they want so they are not forced into a compromising position.

“We try to make sure vacancies occur between AGMs because the worst thing you can do is to rock up to an AGM with a vacancy and you get a shareholder activist like
Jack Tilburn
or a lame duck, someone with the best goodwill in the world but who adds nothing," Carter says.

Some chairmen who have tried to remove an unwilling director have learnt their “blood on the floor" lesson the hard way. Former chairman of the National Australia Bank
Graham Kraehe
remembers picking up the morning paper to discover one of his directors had broken the board’s cone of silence.

“Director calls for sackings in bank war", the headline screamed after former director
Cathy Walter
called for the heads of her fellow directors in the wake of the $360 million foreign currency scandal.

The day before, Kraehe had announced a swingeing response to PwC’s report into the scandal, including sacking and disciplining senior staff and standing Walter down as head of the risk and audit committee.

“I found your conduct and that of other members of the board in seeking by personal denigration and vituperation to pressure my resignation from the board as not worthy of any of you [and] amounted to premeditated and sustained harassment," Walter hit back in a public statement.

The public bust-up provided a rare glimpse into the brutal manoeuvring and politics of the boardroom which is traditionally kept behind closed doors.

Almost 10 years later, Kraehe, who is now chairman of BlueScope Steel and Brambles, still refuses to discuss the incident.

But he does admit the scandal is not the way things are usually done.

High-profile skirmishes

“Usually, you give a director the message that you haven’t got the support from your fellow directors management don’t think you are capable either, and you really would be wise to think about an alternative career," Kraehe says.

“In my experience, on two occasions after a discussion with a director in which you say the board is probably not going to endorse you at the AGM for re-election, the director says I might do other things with my career and they retire, nobody ever knows why but they do retire."

A handful of high-profile skirmishes have spilled out of the boardroom and into the investment markets. Among the most notable were the multimillion-dollar campaign by
Solomon Lew
to keep his seat on the Coles Myer board, former politician
John Ducker
’s removal by shareholders from the Aristocrat board and a split in the Qantas board over the proposed management buyout of the airline in 2007.

But more often than not, the boardroom is an impenetrable black box. Investors are left to hang their hat on the little information which is publicly available, including the independence of directors, their pay, how many meeting they attend and their links to other companies.

Directors and shareholders alike agree the indicators are often a bad measure.

Despite the ASX corporate governance recommendation that boards carry a majority of independent directors, Gonski points out independent directors are among the worst he has worked with, largely because they do not understand the intricacies of the business. Independent or not, what is clear is that directors are not easily removed.

They are returned, on average, by shareholders 96 per cent of the time and their seats are tightly held.

Chaney says the practice at the two boards he chairs, NAB and Woodside, is directors serve for about 10 years.

That means that once elected, shareholders and boards are largely stuck with the directors already in place. The paradox remains that boards cannot fire poorly performing directors and while shareholders can, they have little or no information to decide whether they should.

“It is not a hard and fast rule but it is often discussed," he says. “I remember when I joined the BHP board, there was a note from the chairman which said it is expected that directors would have a tenure of approximately 10 years."

‘Positive disclosure’

Clifford is of the view that boards have to endure a director for three years and can then choose not to endorse the individual rather than triggering a public skirmish.

“I know people think that three years is a long time but it isn’t as if day one a director’s performance is a concern, sometimes you have to wait 12 to 18 months to identify an issue," Clifford says. For the first time, the latest revision to the ASX corporate governance principles requires companies to make “positive disclosure of the measures a board has implemented to address board succession issues and ensure that the board has the appropriate balance of skills, experience, independence and knowledge".

But activist investors claim the answer is simpler. Shareholders must apply a blowtorch to those boards who have overseen the destruction of shareholder value.

“Socially, it is very difficult for a chairman to tap a director on the shoulder when he doesn’t have the power to sack them," Shareholders’ Association spokesman Stephen Mayne says.

The ASA supports fixed tenures for directors; apply a “two duds and you’re out rule", and maintains a five-point system to limit multiple appointments (each board seat counts for one point and a chairman role counts for two).

Mayne says he has also developed his own “little black book" from asking every director he meets who are the best (and worst) directors they have worked with: Paul McClintock, Kevin McCann, Catherine ­Livingstone and Michael Chaney are among the names praised most often.

“That is why it is vital shareholders take a greater interest in the quality of their directors and the removal of duds," he says.

He and other activist shareholders are calling on investors to step up and use their dormant but significant powers to purge disfunctional boards and hold directors to account. Before the AGM season is out we will know whether they do.